Ethics and governance in the European Financial centers

John Christensen from Tax Justice Network last Sunday analysed the reason why the OECD tax model based on bilateral treaties for tax information by request was adopted by secrecy jurisdictions in the European Union that do not want to go further in the implementation of the Savings Directive.

 

The statu quo is promoted by Luxembourg, the tiny jurisdiction where there are so many red flags of frauds and bad governance that are emphasized by the small size all the more than these red flags are visible in public and official sources, which are the visible part of the iceberg. The ABBL (the Luxembourg bankers' Association) wrote: in light of Luxembourg’s decision to adopt OECD standards in tax matters, the government has demanded that the exchange of information upon request, as defined by the OECD Model Tax Convention, becomes the only standard applicable within the European Union.

 

 

As John Christensen explains, The OECD’s standards for tackling tax evasion rely on complex, time‐consuming and ineffective bilateral treaties for tax information by request. G‐20 leaders must seize the current political opportunity to push for a more ambitious multilateral treaty process based on automatic information exchange on the model currently being used within the European Union.

Some will complain that automatic information exchange is too complex and detailed to provide the basis for a global standard for information exchange. We disagree. The OECD standard based on a ‘by request’approach, which they would like to have considered as the global standard, is weak and ineffective. One statistic alone demonstrates how weak they are: in the past three years the British Crown Dependencies of Guernsey, Isle of Man and Jersey have cooperated with only 17 exchanges of information across their entire network of treaty partners. That’s fewer than two exchanges a year for each jurisdiction. No wonder the tax evasion industry prefers the OECD exchange model to the European standard.

If anyone doubts the effectiveness of the European model they should note that a prominent British lawyer ‐ an adviser to tax havens, no less ‐ has urged these jurisdictions to cooperate with the OECD processes in order to resist pressure for the alternative automatic exchange process.

The tax avoidance industry knows that automatic exchange works. It is what the tax avoidance industry is afraid of, and with good reason.

 

 

The OECD on 28 August issued a document to clarify its approach to counter tax evasion.

 

A couple of paragraphs are worth being quoted:

 

[The experts the OECD’s Committee on Fiscal Affairs and the Global Forum have suggested that] a good indicator of progress is whether a jurisdiction has signed 12 agreements on exchange of information that meet the OECD standard. This threshold will be reviewed to take account of (i) the jurisdictions with which the agreements have been signed (a tax haven which has 12 agreements with other tax havens would not pass the threshold), (ii) the willingness of a jurisdiction to continue to sign agreements even after it has reached this threshold and (iii) the effectiveness of implementation. 

 

In 1998 the OECD set out a number of factors for identifying tax havens.

The four key factors were:

1) No or nominal tax on the relevant income;

2) Lack of effective exchange of information;

3) Lack of transparency;

4) No substantial activities.

No or nominal tax is not sufficient in itself to classify a country as a tax haven.

The fourth factor above “no substantial activities” was not considered when determining whether a jurisdiction was cooperative. Thus, in order to avoid being listed as an uncooperative tax haven, jurisdictions which met the criteria were asked only to make commitments to implement the principles of  transparency and exchange of information for tax purposes.

 

The key principles of transparency and exchange of information for tax purposes can be summarised as follows:

• Exchange of information on request where it is “foreseeably relevant” to the administration and enforcement of the domestic laws of a treaty partner.

• No restrictions on exchange caused by bank secrecy or domestic tax interest requirements.

• Availability of reliable information, particularly accounting, bank andownership information and powers to obtain it.

• Respect for taxpayers’ rights.

• Strict confidentiality of information exchanged 

 

First, tax information received from another country can only be used for the purposes stated in the agreements. Second, a country is free to decline a request for information in a number of situations. One reason for declining to provide information relates to the concept of public policy/ordre public. “Public policy” generally refers to the vital interests of a country, for instance where information requested relates to a state secret. A case of “public policy” may also arise, for example, where a tax investigation in another country was motivated by racial or political persecution.

 

The OECD does not have power to impose sanctions on countries that do not implement the standards. Individual countries whether OECD or non‐OECD will decide for themselves what actions they consider necessary to ensure the effective enforcement of their tax laws. The G20 has produced a list of potential measures based upon an analysis provided by the OECD. The OECD will continue to provide a forum where countries can discuss how to make these measures more effective.

 

 

 

In a nutshell, the OECD admits that

 

1) there are loopholes for a given jurisdiction to decline a request for information and its decision is discretionary,

2) it does not have power to impose sanctions on countries that do not implement the standards.

 

 

 

Those who believe that the signature of agreements based on the OECD thax model is the panacea to counter tax evasion are very naive. Aren’t they?

 

France gets a list of 3000 French taxpayers with bank accounts in Switzerland, according to a report in the weekly Journal du Dimanche . Minister Woerth interviewed by the newspapers says the accounts contained some euro 3 billion , "some of which is very likely linked to tax evasion." (original text: Nous avons récupéré les noms de 3000 contribuables détenteurs de comptes dans les banques suisses dont une partie correspond très probablement à de l'évasion fiscale).

I think that Switzerland is alone in front of the USA and now France. Where are the allies of March to protect banking secrecy?

A couple of days ago Austrian political parties have just agreed to relax the country's banking secrecy regarding foreigners, paving the way for parliamentary approval. This agreement secures the two-thirds majority needed to pass legislation that would help remove Austria from the Organization for Economic Cooperation and Development's "gray list" of countries not complying with international tax information standard.

Luxembourg was the first "financial center" to quit the OECD "grey list". But the goal was to sign the required agreements as fast as possible knowing that it will be a long shot in practice for foreign tax administration to gather all information required to formulate the request all the more than the OECD tax model includes discretionary loopholes:

In no case shall the provisions be construed so as to impose on a Contracting State the obligation:
 a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;
 b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;
 c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy (ordre public). 

The culture has not changed in Luxembourg. Definitely not.